Since late April, the central government, at state and local levels, has introduced policies to rein in soaring housing prices - such as curbing lending to developers, limiting loans for second and third homes, requiring higher downpayments, imposing new restrictions on developers' idle land and fine-tuning controls on the use of proceeds from the presale of unfinished flats.

One of the latest measures is discouraging developers from hoarding land by tightening land controls. Developers will be banned from bidding for more land if they have sites idle for more than one year. The impact of these cooling measures was immediate and direct.

Transaction activity in the mainland property market slumped across the board with moderate price corrections.

According to real estate adviser DTZ, the luxury residential sales volume in first-tier cities, such as Beijing, Shanghai, Guangzhou and Shenzhen, dropped by 33 per cent in the period from May to August compared with the January-April period. Selling prices registered an average fall of 12.7 per cent accordingly.

Alan Chiang Sheung-lai, head of DTZ's mainland residential division, says the high-end and luxury residential sectors in Guangzhou and Shanghai were hit harder by the property control measures, with respective declines of 50.5 per cent and 42.3 per cent in sales volume, during the May-August period. The contraction was attributed to buyers staying on the sidelines and fewer new projects being put on sale by developers.

In Shanghai, for example, new policies have been put in place requiring new luxury projects, with flats worth more than 30,000 yuan (HK$34,982) per square metre, to seek presale consent from the city government instead of the local authorities, Chiang says.

Developers are also required to release a complete price list of the luxury flats upon presale approval.

That has effectively raised the bar for acquiring government approval to sell new property projects.

With sluggish sales activity and a slower pace of new property launches, the inventory level of luxury flats has risen in the past few months. Chiang says many mainland developers experienced negative cash flow in the second quarter of this year as a result of reduced property sales, while some of the highly-geared developers were forced to step up sales to raise capital and released more new luxury projects at lower prices in August.

'The high-end residential sector staged a strong rebound in sales activity in August with the launch of more projects by developers,' Chiang says. 'Sales volume in first-tier cities increased by 55 per cent that month compared to July, while that in second-tier cities grew by 22 per cent month-on-month.'

Despite a mild market correction and dampened sentiment in the wake of government controls, prices of top-selling new luxury residential properties have remained steady over the past few months, according to DTZ.

For example, luxury home prices at Huamao City in Beijing were maintained at 27,000 yuan per square metre last month, while those at Triumphant Paradise in Shanghai stood at 45,000 yuan per square metre. Prices at King Metropolis in Shenzhen were 30,000 yuan per square metre and those at Riverside in Guangzhou were 21,000 yuan per square metre.

But developers are offering new incentives to attract interest. Buyers who complete their purchases in these projects with immediate cash or lump-sum payments will enjoy discounts of 4 to 6 per cent, Chiang says.

Alan Liu, managing director for north Asia at Colliers International, says the selling prices of new luxury apartments and villas in Beijing recorded an increase of more than 15 per cent year-on-year in the June-August period. Landlords and developers have maintained firm pricing in anticipation of the market's long-term growth prospects.

In Shanghai, the luxury residential market has remained relatively unscathed as home buying sentiment and sales volume recovered after mid-August.

'The high-end sector is well-endowed with investors with strong holding power,' Liu says. 'However, we can expect a slight drop in prices before the end of 2010 and this will be followed by a moderate price recovery in the first half of 2011.

'Future price growth will be subdued as it seems that the central government will implement further tightening measures in the event of any significant growth in residential prices.'

In Guangdong province, transaction volumes were substantially reduced as a result of the property control policies. According to Colliers International, small- and medium-sized developers were affected more seriously, while the bigger players are financially stronger and face no particular pressure to resort to price-cutting sales.

Chiang says that the supply of new luxury flats in major cities is expected to rise in the next six to 12 months, as developers have stepped up construction of their projects since the macro control measures.

'The market will see further fluctuations in prices and sales volume,' he says. 'In the longer term, however, the prospects remain positive given sustained underlying demand. Capital continues to flow into the property sector and there is a strong desire in buying into property assets to hedge against inflation on the mainland.'